<PAGE> 1
SCHWABFUNDS (R)
[LOGO]
SCHWAB
GOVERNMENT
BOND FUNDS
SEMI-ANNUAL REPORT
FEBRUARY 28, 1997
<PAGE> 2
Dear Shareholder,
[Photo of With the support of investors like you, the SchwabFunds Family(R)
Charles continues to be among the largest and fastest-growing mutual fund
R. Schwab] complexes in the nation. Charles Schwab Investment Management,
Inc. (CSIM) manages over $46 billion in assets for more than 2.5
million shareholders. Today CSIM offers investors 30 funds
spanning a spectrum of financial markets and investing styles.
You'll find in-depth information on the performance of your
SchwabFunds(R) investment in the following pages.
LONG-TERM INVESTMENT STRATEGIES
SchwabFunds' expanding family of quality mutual funds offers investors
time-tested strategies for long-term investing -- Asset Allocation, Indexing,
Tax-Efficiency, Quantitative Models and Fund-of-Funds. Each strategy was
developed to fit specific financial objectives. The SchwabFunds Family was
developed to provide you with smart, cost-efficient solutions and an easy,
convenient way to put your money to work. And we'll continue to explore new
strategies to help meet your financial goals.
EXPANDING CHANNELS OF COMMUNICATION
If you're among the millions of people exploring the Internet, I encourage you
to visit our Web site at www.schwab.com/funds. There you'll find a wealth of
online information about SchwabFunds as well as a wide range of investments and
resources available from Schwab. You can access the latest mutual fund
performance data, request a free fund prospectus, trade funds and more -- all
from the comfort of your home or office, 24 hours a day. It's just one more way
we're harnessing the latest technology to make investing easier and more
convenient.
Thank you for placing your trust in SchwabFunds. In the year ahead, we'll
continue working to provide you with an expanding range of investment
opportunities to meet your growing needs.
/s/ Charles R. Schwab
Charles R. Schwab
<PAGE> 3
KEEP YOUR
MONEY WORKING
HARDER!
----------------------------------
USE THIS ENVELOPE TO EASILY ADD TO
YOUR SCHWAB BOND FUND.
CHARLES SCHWAB
<PAGE> 4
WE'VE MADE IT EASIER FOR YOU! TAKE ADVANTAGE OF THIS OPPORTUNITY TO ADD TO YOUR
SCHWAB BOND FUND INVESTMENT.
Now, you can add to your account by using this convenient Schwab investment
coupon. It's a simple, easy way to increase your investment. You can also have
money transferred to your bond fund directly from your bank account or payroll
check using Schwab's free Automatic Investment Plan (AIP)(1). If you'd like
more information on AIP, just check the appropriate box on the coupon. We'll
send you everything you need to get started.
SO DON'T DELAY. USE THIS CONVENIENT INVESTMENT
ENVELOPE AND SEND YOUR CHECK TODAY!
(1) The Automatic Investment Plan does not ensure profit or protect against
loss in declining markets.
- --------------------------------------------------------------------------------
PLEASE DETACH HERE.
SCHWAB BOND FUND
INVESTMENT COUPON
- ------------------
Please enclose your check and this completed investment coupon
in the attached postage-paid envelope.
[ ][ ][ ][ ]-[ ][ ][ ][ ]
- -------------------------------------- SCHWAB ACCOUNT NUMBER
Name
$
- --------------------------------------
Amount of Investment*
- --------------------------------------
Signature
[ ] Check here if you would like more investment coupons for
future use.
[ ] Check here if you would like more information on Schwab's
Automatic Investment Plan (AIP).
* THIS ENVELOPE MAY NOT BE USED FOR INITIAL INVESTMENTS. SUBSEQUENT INVESTMENT
MINIMUM IS $100.
PLEASE INDICATE TO WHICH SCHWAB BOND FUND YOUR INVESTMENT SHOULD GO:
[ ] Schwab Long-Term Government Bond Fund
[ ] Schwab Short/Intermediate Government Bond Fund
[ ] Schwab California Long-Term Tax-Free Bond Fund
[ ] Schwab California Short/Intermediate Tax-Free Bond Fund
[ ] Schwab Long-Term Tax-Free Fund
[ ] Schwab Short/Intermediate Tax-Free Fund
IF NO FUND IS INDICATED, YOUR INVESTMENT WILL GO INTO THE SWEEP ACCOUNT YOU'VE
DESIGNATED.
----------------------------------------
(LIFT HERE FOR MORE INFORMATION)
----------------------------------------
(C) 1996 Charles Schwab & Co., Inc. All rights reserved. Member SIPC/NYSE.
Printed on recycled paper. TF4269 (10/96) CRS 10552
<PAGE> 5
CharlesSchwab
JUST FOLLOW THESE EASY STEPS TO INVEST IN YOUR SCHWAB BOND FUND:
1. Fill out the Schwab investment coupon completely, This envelope must
including your name, account number, amount of be preceded or
your check and signature. Please use one coupon accompanied by a
for each account. current Schwab Bond
Fund prospectus. The
2. Make your check payable to CHARLES SCHWAB & CO., principal value and
INC., and enclose your check with the completed investment returns will
coupon in this postage-paid envelope. fluctuate so that an
investor's shares, when
3. Then just drop your Schwab Bond Fund investment redeemed, may be worth
envelope in the mail today--and start putting your more or less than their
money to work! If you have any questions, don't original cost.
hesitate to call your local Schwab office or
1-800-2 NO LOAD.
<PAGE> 6
Attn: Dept. AIP 333-4
--------------
NO POSTAGE
NECESSARY IF
MAILED IN THE
UNITED STATES
--------------
-------------------------------------
BUSINESS REPLY MAIL
FIRST-CLASS MAIL PERMIT NO. 18125 [BAR CODE]
SAN FRANCISCO, CA
-------------------------------------
POSTAGE WILL BE PAID BY ADDRESSEE
CHARLES SCHWAB & CO., INC.
PO BOX 7778
SAN FRANCISCO CA 94120-9419
<PAGE> 7
Table of Contents
<TABLE>
<S> <C>
PERFORMANCE .................................................. 2
DIVIDEND PAYMENT ............................................. 6
FUND INVESTMENTS SUMMARY ..................................... 7
PORTFOLIO MANAGEMENT TEAM .................................... 8
MARKET OVERVIEW .............................................. 9
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM ................... 15
FINANCIAL STATEMENTS AND NOTES ............................... 18
</TABLE>
We are pleased to report to you on the performance of the Schwab
Short/Intermediate Government Bond Fund and the Schwab Long-Term Government Bond
Fund (the "Funds") for the six-month period ended February 28, 1997. During the
period, both Funds continued to achieve their primary objectives by providing a
relatively steady stream of monthly income, consistent with capital
preservation. Each Fund's individual performance is reviewed in detail in the
following pages.
1
<PAGE> 8
PERFORMANCE
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
Yield and Total Return as of February 28, 1997
(Fund Inception 11/5/91)
<TABLE>
<CAPTION>
Average Annual
30-Day 6-Month 1-Year 5-Year Total Return
SEC Yield Total Return Total Return Total Return Since Inception
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
5.77% 3.54% 4.53% 5.52% 5.65%
--------------------------------------------------------------------
</TABLE>
As of 12/31/96, the 30-day SEC yield and six-month, one-year, five-year and
since inception average annual total returns for the Fund were 5.70%, 3.37%,
4.01%, 5.10% and 5.70%, respectively.
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed that maximum total operating expenses will
not exceed 0.49%. This guarantee may be discontinued at any time. Without fee
waivers and guarantees, for the period ended 2/28/97, the Fund's 30-day SEC
yield and six-month, one-year, five-year and since inception average annual
total returns would have been 5.43%, 3.36%, 4.18%, 5.22% and 5.30%,
respectively. For the period ended 12/31/96, the Fund's 30-day SEC yield and
six-month, one-year, five-year and since inception average annual total returns,
without fee waivers and guarantees, would have been 5.36%, 3.19%, 3.67%, 4.78%
and 5.36%, respectively.
2
<PAGE> 9
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB SHORT/INTERMEDIATE
GOVERNMENT BOND FUND AND THE LEHMAN
MUTUAL FUND SHORT (1-3 YEAR) U.S. GOVERNMENT INDEX
AVERAGE ANNUAL TOTAL RETURNS
THROUGH FEBRUARY 28, 1997
ONE YEAR FIVE YEAR SINCE INCEPTION
4.53% 5.52% 5.65%
[LINE GRAPH]
<TABLE>
<CAPTION>
11/5/91 11/30/91 12/30/91 1/30/92 2/29/92 3/31/92 4/30/92 5/31/92 6/30/92 7/31/92 8/31/92 9/30/92
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $ 10,000 10,059 10,212 10,199 10,229 10,226 10,319 10,415 10,521 10,642 10,728 10,829
Fund $ 10,000 10,117 10,381 10,241 10,240 10,190 10,282 10,440 10,595 10,794 10,898 11,053
<CAPTION>
10/31/92 11/30/92 12/31/92 1/31/93 2/28/93 3/31/93 4/30/93 5/31/93 6/30/93 7/31/93 8/31/93 9/30/93
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $ 10,767 10,751 10,851 10,965 11,052 11,087 11,154 11,128 11,211 11,236 11,329 11,365
Fund $ 10,924 10,868 11,012 11,202 11,355 11,395 11,499 11,462 11,622 11,661 11,823 11,851
<CAPTION>
10/31/93 11/30/93 12/31/93 1/31/94 2/28/94 3/31/94 4/30/94 5/31/94 6/30/94 7/31/94 8/31/94 9/30/94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $ 11,390 11,392 11,438 11,509 11,439 11,380 11,337 11,353 11,381 11,484 11,522 11,495
Fund $ 11,892 11,819 11,873 11,973 11,780 11,628 11,527 11,485 11,500 11,599 11,628 11,585
<CAPTION>
10/31/94 11/30/94 12/31/94 1/31/95 2/28/95 3/31/95 4/30/95 5/31/95 6/30/95 7/31/95 8/31/95 9/30/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $ 11,522 11,473 11,495 11,654 11,815 11,883 11,989 12,197 12,263 12,314 12,388 12,449
Fund $ 11,593 11,528 11,540 11,697 11,852 11,919 12,018 12,232 12,281 12,308 12,396 12,470
<CAPTION>
10/31/95 11/30/95 12/31/95 1/31/96 2/29/96 3/31/96 4/30/96 5/31/96 6/30/96 7/31/96 8/31/96 9/30/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $ 12,552 12,659 12,754 12,862 12,812 12,803 12,816 12,844 12,938 12,988 13,036 13,155
Fund $ 12,572 12,696 12,799 12,900 12,817 12,778 12,776 12,777 12,878 12,917 12,940 13,072
<CAPTION>
10/31/96 11/30/96 12/31/96 1/31/97 2/28/97
<S> <C> <C> <C> <C> <C>
Index $ 13,304 13,402 13,405 13,469 13,501
Fund $ 13,235 13,368 13,311 13,378 13,397
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
Short/Intermediate Government Bond Fund since inception with a hypothetical
investment in the Lehman Mutual Fund Short (1-3 Year) U.S. Government Index.
The Index is unmanaged and assumes reinvestment of all dividends, and, unlike
the Fund, does not reflect the payment of advisory fees and other expenses
associated with an investment in the Fund. Investors cannot invest in an index
directly. Fund total return assumes the reinvestment of all dividends and
capital gain distributions, if any. The investment Manager and Schwab waived a
portion of their fees during the reporting period, and have guaranteed that
maximum total operating expenses will not exceed 0.49%. This guarantee may be
discontinued at any time. Without fee waivers and guarantees, the Fund's total
return would have been lower.
3
<PAGE> 10
SCHWAB LONG-TERM GOVERNMENT BOND FUND
Yield and Total Return as of February 28, 1997
(Fund Inception 3/5/93)
<TABLE>
<CAPTION>
Average Annual
30-Day 6-Month 1-Year Total Return
SEC Yield Total Return Total Return Since Inception
--------------------------------------------------------------------
<S> <C> <C> <C>
6.77% 6.14% 3.99% 5.87%
--------------------------------------------------------------------
</TABLE>
As of 12/31/96, the 30-day SEC yield and six-month, one-year and since inception
average annual total returns for the Fund were 6.96%, 5.40%, 1.06% and 6.06%,
respectively.
TOTAL RETURN ASSUMES REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN
DISTRIBUTIONS, IF ANY. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
PRINCIPAL VALUE AND INVESTMENT RETURNS WILL FLUCTUATE, SO THAT AN INVESTOR'S
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. The
Investment Manager and Schwab waived a portion of their fees during the
reporting period and have guaranteed that maximum total operating expenses will
not exceed 0.30%. This guarantee may be discontinued at any time. Without this
waiver, for the period ended 2/28/97, the Fund's 30-day SEC yield and six-month,
one-year, and since inception average annual total returns would have been
5.95%, 5.59%, 2.80% and 3.32%, respectively. For the period ended 12/31/96, the
Fund's 30-day SEC yield and six-month, one-year and since inception average
annual total returns, without fee waivers and guarantees, would have been 5.82%,
4.70%, -0.13% and 3.44%, respectively.
4
<PAGE> 11
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL
$10,000 INVESTMENT IN THE SCHWAB LONG-TERM
GOVERNMENT BOND FUND AND THE LEHMAN
MUTUAL FUND GENERAL U.S. GOVERNMENT INDEX
[LINE GRAPH]
<TABLE>
<CAPTION>
3/31/93 4/30/93 5/31/93 6/30/93 7/31/93 8/31/93 9/30/93 10/31/93 11/30/93 12/31/93 1/31/94 2/28/94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,000 $10,077 $10,066 $10,289 $10,352 $10,583 $10,623 $10,664 $10,546 $10,587 $10,732 $10,505
Fund $10,000 $ 9,890 $ 9,927 $10,314 $10,441 $10,863 $10,901 $10,952 $10,688 $10,738 $10,938 $10,544
<CAPTION>
3/31/94 4/30/94 5/31/94 6/30/94 7/31/94 8/31/94 9/30/94 10/31/94 11/30/94 12/31/94 1/31/95 2/28/95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,269 $10,187 $10,174 $10,151 $10,338 $10,340 $10,194 $10,187 $10,168 $10,230 $10,421 $10,645
Fund $10,220 $10,112 $10,060 $10,027 $10,239 $10,233 $10,005 $10,036 $10,031 $10,122 $10,347 $10,648
<CAPTION>
3/31/95 4/30/95 5/31/95 6/30/95 7/31/95 8/31/95 9/30/95 10/31/95 11/30/95 12/31/95 1/31/96 2/29/96
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $10,712 $10,852 $11,289 $11,376 $11,334 $11,467 $11,577 $11,753 $11,936 $12,106 $12,180 $11,931
Fund $10,718 $10,887 $11,429 $11,445 $11,348 $11,566 $11,711 $11,931 $12,173 $12,395 $12,438 $12,075
<CAPTION>
3/31/96 4/30/96 5/31/96 6/30/96 7/31/96 8/31/96 9/30/96 10/31/96 11/30/96 12/31/96 1/31/97 2/28/97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Index $11,832 $11,756 $11,736 $11,888 $11,918 $11,891 $12,089 $12,355 $12,570 $12,441 $12,455 $12,473
Fund $11,934 $11,766 $11,722 $11,885 $11,890 $11,830 $12,112 $12,451 $12,763 $12,537 $12,533 $12,556
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. PRINCIPAL VALUE AND
INVESTMENT RETURNS WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
The performance graph compares a hypothetical $10,000 investment in the Schwab
Long-Term Government Bond Fund since inception with a hypothetical investment
in the Lehman Mutual Fund General U.S. Government Index. The Index is unmanaged
and assumes reinvestment of all dividends, and, unlike the Fund, does not
reflect the payment of advisory fees and other expenses associated with an
investment in the Fund. Investors cannot invest in an index directly. Fund
total return assumes the reinvestment of all dividends and capital gain
distributions, if any. The Investment Manager and Schwab waived a portion of
their fees during the reporting period, and have guaranteed that maximum total
operating expenses will not exceed 0.30%. This guarantee may be discontinued at
any time. Without fee waivers and guarantees, the Fund's total return would
have been lower.
5
<PAGE> 12
ANNUAL DIVIDEND PAYMENT AS OF FISCAL
YEAR-END FROM EACH FUND'S INCEPTION DATE
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
6-month
1991* 1992 1993 1994 1995 1996 Reporting Period
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Dividends $0.10 $ 0.60 $ 0.37 $ 0.54 $ 0.59 $ 0.59 $ 0.30
- ---------------------------------------------------------------------------------
Capital Gains -- 0.03 -- 0.12 -- -- --
- ---------------------------------------------------------------------------------
</TABLE>
*Commencement of operations November 5, 1991.
SCHWAB LONG-TERM GOVERNMENT BOND FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
6-month
1993* 1994 1995 1996 Reporting Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Income Dividends $ 0.31 $ 0.60 $ 0.69 $ 0.65 $ 0.33
- --------------------------------------------------------------------------------
Capital Gains -- -- -- -- --
- --------------------------------------------------------------------------------
</TABLE>
*Commencement of operations March 5, 1993.
FUND INVESTMENTS
The investment portfolios of both Funds consist of a mix of bonds issued or
guaranteed by the U.S. government, its agencies and instrumentalities. More
detailed information on each Fund's investments, as of February 28, 1997, can be
found in the Schedule of Investments section of this report, which follows the
Question and Answer section. This information is not necessarily indicative of
the Funds' future holdings.
6
<PAGE> 13
SCHWAB SHORT/INTERMEDIATE GOVERNMENT
BOND FUND COMPOSITION
[PIE CHART]
<TABLE>
<S> <C>
Cash Equivalents 3.7%
Agency Obligations 41.0%
U.S. Treasury Obligations 42.6%
Collateralized Mortgage Obligations 12.7%
</TABLE>
SCHWAB LONG-TERM GOVERNMENT
BOND FUND COMPOSITION
[PIE CHART]
<TABLE>
<S> <C>
Cash Equivalents 2.5%
Agency Obligations 70.4%
U.S. Treasury Obligations 27.1%
</TABLE>
7
<PAGE> 14
PORTFOLIO MANAGEMENT TEAM
STEPHEN B. WARD - Senior Vice President and Chief Investment Officer, has
overall responsibility for the management of each Fund's portfolio. Steve joined
CSIM as Vice President and Portfolio Manager in April 1991, and was promoted to
his current position in August 1993. Prior to joining CSIM, Steve was Vice
President and Portfolio Manager at Federated Investors.
ANDREA REGAN - Vice President and Senior Portfolio Manager, has primary
responsibility for the day-to-day management of each Fund's portfolio. Andrea
joined CSIM in January 1991 and currently manages approximately $3 billion in
assets. Prior to joining CSIM, Andrea was Vice President and Manager of Trading
for Merus Capital Management, the investment management division of the Bank of
California.
The following market overviews and answers to questions are provided by the
Portfolio Management Team.
8
<PAGE> 15
MARKET OVERVIEW
REAL GDP GROWTH RATE
[BAR GRAPH]
<TABLE>
<CAPTION>
Real
GDP
-----
<S> <C>
Q1 1990 4.1%
Q2 1990 1.3%
Q3 1990 -1.9%
Q4 1990 -4.1%
Q1 1991 -2.2%
Q2 1991 1.7%
Q3 1991 1.0%
Q4 1991 1.0%
Q1 1992 4.7%
Q2 1992 2.5%
Q3 1992 3.0%
Q4 1992 4.3%
Q1 1993 -0.1%
Q2 1993 1.9%
Q3 1993 2.3%
Q4 1993 4.8%
Q1 1994 2.5%
Q2 1994 4.9%
Q3 1994 3.5%
Q4 1994 3.0%
Q1 1995 0.4%
Q2 1995 0.7%
Q3 1995 3.8%
Q4 1995 0.3%
Q1 1996 2.0%
Q2 1996 4.7%
Q3 1996 2.1%
Q4 1996 3.9%
</TABLE>
- - The economy continued to expand at a healthy rate during the reporting
period. The GDP growth rate was 2.1% and 3.9% for the third and fourth
quarters, and 3.2% for the full year (1996).
- - The particularly strong second and fourth quarter in 1996 growth rates of
4.7% and 3.9%, respectively, resulted in sentiment focusing on the apparent
strength of the economy and its potential impact on future inflation and
Federal Reserve Board (Fed) policy.
- - At the time of this writing, the economy appears to be on track for moderate
growth, continuing the six year expansion which began in 1991.
9
<PAGE> 16
[LINE GRAPH]
U.S. UNEMPLOYMENT RATE
<TABLE>
<CAPTION>
Unemployment
Rate
------------
<S> <C>
Jan-90 5.3%
Feb-90 5.3%
Mar-90 5.2%
Apr-90 5.4%
May-90 5.3%
Jun-90 5.1%
Jul-90 5.4%
Aug-90 5.6%
Sep-90 5.7%
Oct-90 5.8%
Nov-90 6.0%
Dec-90 6.2%
Jan-91 6.3%
Feb-91 6.5%
Mar-91 6.8%
Apr-91 6.6%
May-91 6.8%
Jun-91 6.8%
Jul-91 6.7%
Aug-91 6.8%
Sep-91 6.8%
Oct-91 6.9%
Nov-91 6.9%
Dec-91 7.1%
Jan-92 7.1%
Feb-92 7.3%
Mar-92 7.3%
Apr-92 7.3%
May-92 7.4%
Jun-92 7.7%
Jul-92 7.6%
Aug-92 7.6%
Sep-92 7.5%
Oct-92 7.4%
Nov-92 7.3%
Dec-92 7.3%
Jan-93 7.1%
Feb-93 7.0%
Mar-93 7.0%
Apr-93 7.0%
May-93 6.9%
Jun-93 6.9%
Jul-93 6.8%
Aug-93 6.7%
Sep-93 6.7%
Oct-93 6.7%
Nov-93 6.5%
Dec-93 6.4%
Jan-94 6.7%
Feb-94 6.6%
Mar-94 6.5%
Apr-94 6.4%
May-94 6.0%
Jun-94 6.0%
Jul-94 6.1%
Aug-94 6.1%
Sep-94 5.9%
Oct-94 5.6%
Nov-94 5.6%
Dec-94 5.4%
Jan-95 5.6%
Feb-95 5.4%
Mar-95 5.8%
Apr-95 5.7%
May-95 5.7%
Jun-95 5.6%
Jul-95 5.7%
Aug-95 5.3%
Sep-95 5.6%
Oct-95 5.5%
Nov-95 5.6%
Dec-95 5.6%
Jan-96 5.8%
Feb-96 5.5%
Mar-96 5.6%
Apr-96 5.4%
May-96 5.6%
Jun-96 5.3%
Jul-96 5.4%
Aug-96 5.1%
Sep-96 5.2%
Oct-96 5.2%
Nov-96 5.3%
Dec-96 5.3%
Jan-97 5.4%
Feb-97 5.3%
</TABLE>
- - Although trending up during the second half of the year, the unemployment
rate during 1996 remained near its lows for the decade, leading many
economists to question whether such low levels can continue without
generating inflationary pressures on wages and, ultimately, prices.
10
<PAGE> 17
MEASURES OF INFLATION
[BAR GRAPH]
<TABLE>
<CAPTION>
Monthly Quarterly Employment Employment
Consumer Price Employment Cost Cost Index - Cost Index - 4 Employment Cost
Index - YOY% Index - YOY% Quarterly quarter rolling Index % Change
Change Change (annualized) average (SA) Index (1/90=0)
-------------- --------------- ------------ --------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Jan-90 5.2% 5.3% 5.3% 5.1% 1.3% 1.065
Feb-90 5.3% 5.3% 5.3% 5.1% 1.3% 1.065
Mar-90 5.2% 5.3% 5.3% 5.1% 1.3% 1.065
Apr-90 4.7% 5.4% 5.3% 5.3% 1.3% 1.078
May-90 4.4% 5.4% 5.3% 5.3% 1.3% 1.078
Jun-90 4.7% 5.4% 5.3% 5.3% 1.3% 1.078
Jul-90 4.8% 5.1% 4.5% 5.4% 1.1% 1.090
Aug-90 5.6% 5.1% 4.5% 5.4% 1.1% 1.090
Sep-90 6.2% 5.1% 4.5% 5.4% 1.1% 1.090
Oct-90 6.3% 4.8% 4.1% 5.1% 1.0% 1.101
Nov-90 6.3% 4.8% 4.1% 5.1% 1.0% 1.101
Dec-90 6.1% 4.8% 4.1% 5.1% 1.0% 1.101
Jan-91 5.7% 4.6% 4.5% 4.8% 1.1% 1.113
Feb-91 5.3% 4.6% 4.5% 4.8% 1.1% 1.113
Mar-91 4.9% 4.6% 4.5% 4.8% 1.1% 1.113
Apr-91 4.9% 4.5% 4.9% 4.6% 1.2% 1.127
May-91 5.0% 4.5% 4.9% 4.6% 1.2% 1.127
Jun-91 4.7% 4.5% 4.9% 4.6% 1.2% 1.127
Jul-91 4.4% 4.3% 3.6% 4.5% 0.9% 1.137
Aug-91 3.8% 4.3% 3.6% 4.5% 0.9% 1.137
Sep-91 3.4% 4.3% 3.6% 4.5% 0.9% 1.137
Oct-91 2.9% 4.2% 3.6% 4.3% 0.9% 1.147
Nov-91 3.0% 4.2% 3.6% 4.3% 0.9% 1.147
Dec-91 3.1% 4.2% 3.6% 4.3% 0.9% 1.147
Jan-92 2.6% 4.1% 4.1% 4.2% 1.0% 1.159
Feb-92 2.8% 4.1% 4.1% 4.2% 1.0% 1.159
Mar-92 3.2% 4.1% 4.1% 4.2% 1.0% 1.159
Apr-92 3.2% 3.5% 2.8% 4.1% 0.7% 1.167
May-92 3.0% 3.5% 2.8% 4.1% 0.7% 1.167
Jun-92 3.1% 3.5% 2.8% 4.1% 0.7% 1.167
Jul-92 3.2% 3.4% 3.2% 3.5% 0.8% 1.176
Aug-92 3.1% 3.4% 3.2% 3.5% 0.8% 1.176
Sep-92 3.0% 3.4% 3.2% 3.5% 0.8% 1.176
Oct-92 3.2% 3.5% 4.1% 3.4% 1.0% 1.188
Nov-92 3.0% 3.5% 4.1% 3.4% 1.0% 1.188
Dec-92 2.9% 3.5% 4.1% 3.4% 1.0% 1.188
Jan-93 3.3% 3.4% 3.6% 3.5% 0.9% 1.198
Feb-93 3.2% 3.4% 3.6% 3.5% 0.9% 1.198
Mar-93 3.1% 3.4% 3.6% 3.5% 0.9% 1.198
Apr-93 3.2% 3.6% 3.6% 3.4% 0.9% 1.209
May-93 3.2% 3.6% 3.6% 3.4% 0.9% 1.209
Jun-93 3.0% 3.6% 3.6% 3.4% 0.9% 1.209
Jul-93 2.8% 3.6% 3.2% 3.6% 0.8% 1.219
Aug-93 2.8% 3.6% 3.2% 3.6% 0.8% 1.219
Sep-93 2.7% 3.6% 3.2% 3.6% 0.8% 1.219
Oct-93 2.8% 3.4% 3.2% 3.6% 0.8% 1.229
Nov-93 2.7% 3.4% 3.2% 3.6% 0.8% 1.229
Dec-93 2.7% 3.4% 3.2% 3.6% 0.8% 1.229
Jan-94 2.5% 3.2% 2.8% 3.4% 0.7% 1.237
Feb-94 2.5% 3.2% 2.8% 3.4% 0.7% 1.237
Mar-94 2.5% 3.2% 2.8% 3.4% 0.7% 1.237
Apr-94 2.4% 3.1% 3.2% 3.2% 0.8% 1.247
May-94 2.3% 3.1% 3.2% 3.2% 0.8% 1.247
Jun-94 2.5% 3.1% 3.2% 3.2% 0.8% 1.247
Jul-94 2.8% 3.1% 3.2% 3.1% 0.8% 1.257
Aug-94 2.9% 3.1% 3.2% 3.1% 0.8% 1.257
Sep-94 3.0% 3.1% 3.2% 3.1% 0.8% 1.257
Oct-94 2.6% 3.0% 2.8% 3.1% 0.7% 1.266
Nov-94 2.7% 3.0% 2.8% 3.1% 0.7% 1.266
Dec-94 2.7% 3.0% 2.8% 3.1% 0.7% 1.266
Jan-95 2.8% 3.0% 2.8% 3.0% 0.7% 1.275
Feb-95 2.9% 3.0% 2.8% 3.0% 0.7% 1.275
Mar-95 2.9% 3.0% 2.8% 3.0% 0.7% 1.275
Apr-95 3.1% 3.0% 3.2% 3.0% 0.8% 1.285
May-95 3.2% 3.0% 3.2% 3.0% 0.8% 1.285
Jun-95 3.0% 3.0% 3.2% 3.0% 0.8% 1.285
Jul-95 2.8% 2.8% 2.4% 3.0% 0.6% 1.293
Aug-95 2.6% 2.8% 2.4% 3.0% 0.6% 1.293
Sep-95 2.5% 2.8% 2.4% 3.0% 0.6% 1.293
Oct-95 2.8% 2.8% 2.8% 2.8% 0.7% 1.302
Nov-95 2.6% 2.8% 2.8% 2.8% 0.7% 1.302
Dec-95 2.5% 2.8% 2.8% 2.8% 0.7% 1.302
Jan-96 2.7% 2.9% 3.2% 2.8% 0.8% 1.312
Feb-96 2.7% 2.9% 3.2% 2.8% 0.8% 1.312
Mar-96 2.8% 2.9% 3.2% 2.8% 0.8% 1.312
Apr-96 2.9% 2.9% 3.2% 2.9% 0.8% 1.323
May-96 2.9% 2.9% 3.2% 2.9% 0.8% 1.323
Jun-96 2.8% 2.9% 3.2% 2.9% 0.8% 1.323
Jul-96 3.0% 2.9% 2.4% 2.9% 0.6% 1.331
Aug-96 2.9% 2.9% 2.4% 2.9% 0.6% 1.331
Sep-96 3.0% 2.9% 2.4% 2.9% 0.6% 1.331
Oct-96 3.0% 3.0% 3.2% 2.9% 0.8% 1.341
Nov-96 3.3% 3.0% 3.2% 2.9% 0.8% 1.341
Dec-96 3.3% 3.0% 3.2% 2.9% 0.8% 1.341
Jan-97 3.0% 2.2% 0.0% 3.0% 1.341
Feb-97 3.0% 2.2% 0.0% 3.0% 1.341
1.341
</TABLE>
Source: Bloomberg L.P.
- - Although trending slightly upward, both Employment Cost and CPI remained
relatively stable during 1996, reflecting continued low levels of inflation.
- - CPI rose 3.3% in 1996, the highest annual rate since 1990. However, the core
rate (which excludes the more volatile food and energy components) rose just
2.6%, the lowest rate since 1965.
- - The Fed has indicated its belief that the economy remains in the zone where
inflation risks are on the upside and that it is poised to act preemptively
by raising interest rates if necessary. The Fed did take action in March by
increasing the Fed Funds Rate by 0.25%.
11
<PAGE> 18
TOTAL RETURN PERFORMANCE
GROWTH OF A DOLLAR INVESTED
[LINE GRAPH]
<TABLE>
<CAPTION>
Monthly Total Return
-------------------------------------------
Lehman
MF
Schwab Schwab General
Small Cap Int'l US Govt.
S&P 500 Index Index Index
------- --------- ------ ---------
<S> <C> <C> <C> <C>
Sep-96 5.62% 3.68% 2.94% 1.66%
Oct-96 2.76% -1.71% -0.34% 2.20%
Nov-96 7.56% 3.98% 4.64% 1.74%
Dec-96 -1.98% 1.86% -0.88% -1.02%
Jan-97 6.24% 2.36% -3.32% 0.11%
Feb-97 0.79% -2.44% 1.67% 0.14%
</TABLE>
<TABLE>
<CAPTION>
Growth of a $ Investment
-------------------------------------------
Lehman
MF
Schwab Schwab General
Small Cap Int'l US Govt.
S&P 500 Index Index Index
------- --------- ------ --------
<C> <C> <C> <C> <C>
$1.000 $1.000 $1.000 $1.000
Sep-96 $1.056 $1.037 $1.029 $1.017
Oct-96 $1.085 $1.019 $1.026 $1.039
Nov-96 $1.167 $1.060 $1.074 $1.057
Dec-96 $1.144 $1.079 $1.064 $1.046
Jan-97 $1.216 $1.105 $1.029 $1.047
Feb-97 $1.225 $1.078 $1.046 $1.049
</TABLE>
- - Large cap domestic stocks, as represented by the S&P 500, were clearly the
strongest performing asset class, achieving a 22.5% return during the
six-month reporting period.
- - Although positive, domestic small cap stock (as represented by the Schwab
Small-Cap Index) and international stock total returns (as represented by the
Schwab International Index) both lagged the S&P 500 with six month returns of
7.8% and 4.6%, respectively.
- - The six-month total return for U.S. Government bonds (as represented by the
Lehman Mutual Fund General U.S. Government Index) was 4.9%.
12
<PAGE> 19
S&P 500 PRICE EARNINGS RATIO
[LINE GRAPH]
<TABLE>
<CAPTION>
S&P 500
Price
Earnings
Ratio
--------
<S> <C>
Jan-90 14.37
Feb-90 14.21
Mar-90 14.77
Apr-90 14.82
May-90 15.84
Jun-90 16.66
Jul-90 16.65
Aug-90 15.57
Sep-90 14.90
Oct-90 14.36
Nov-90 14.59
Dec-90 15.19
Jan-91 14.95
Feb-91 16.82
Mar-91 17.48
Apr-91 17.85
May-91 17.92
Jun-91 17.96
Jul-91 18.07
Aug-91 19.72
Sep-91 19.88
Oct-91 19.92
Nov-91 21.02
Dec-91 21.85
Jan-92 23.35
Feb-92 23.83
Mar-92 25.45
Apr-92 25.51
May-92 25.71
Jun-92 25.08
Jul-92 25.61
Aug-92 25.50
Sep-92 24.37
Oct-92 23.94
Nov-92 24.08
Dec-92 24.01
Jan-93 24.20
Feb-93 24.25
Mar-93 24.22
Apr-93 23.20
May-93 23.21
Jun-93 22.58
Jul-93 22.52
Aug-93 23.02
Sep-93 23.74
Oct-93 23.97
Nov-93 22.55
Dec-93 23.55
Jan-94 22.98
Feb-94 21.17
Mar-94 20.34
Apr-94 20.10
May-94 20.16
Jun-94 19.76
Jul-94 18.64
Aug-94 18.90
Sep-94 18.26
Oct-94 17.55
Nov-94 16.58
Dec-94 16.98
Jan-95 16.23
Feb-95 16.20
Mar-95 16.50
Apr-95 16.02
May-95 16.43
Jun-95 16.82
Jul-95 16.55
Aug-95 16.18
Sep-95 16.86
Oct-95 16.18
Nov-95 17.14
Dec-95 17.41
Jan-96 18.11
Feb-96 18.56
Mar-96 18.94
Apr-96 19.16
May-96 19.48
Jun-96 19.30
Jul-96 18.31
Aug-96 18.62
Sep-96 19.75
Oct-96 19.60
Nov-96 21.05
Dec-96 20.70
Jan-97 20.55
Feb-97 20.98
</TABLE>
- - The price earnings ratio for the S&P 500 was 21 at the close of the reporting
period, well above its 30-year mean of 15, but below its 1992 and 1987 highs
of 26 and 22, respectively.
- - Based on other traditional measures such as the price-to-book value ratio or
dividend yield, the U.S. stock market valuation, as measured by the S&P 500,
reached historical highs during the reporting period.
13
<PAGE> 20
30-YEAR AND 5-YEAR TREASURY BOND YIELDS
[LINE GRAPH]
<TABLE>
<CAPTION>
Thirty
Year Five Year
Treasury Treasury
Bond Bond
Yield Yield
-------- --------
<S> <C> <C>
9/9/96 7.11% 6.70%
9/13/96 6.95% 6.47%
9/20/96 7.04% 6.62%
9/27/96 6.91% 6.44%
10/4/96 6.74% 6.21%
10/11/96 6.85% 6.28%
10/18/96 6.80% 6.25%
10/25/96 6.82% 6.26%
11/1/96 6.68% 6.11%
11/8/96 6.51% 6.03%
11/15/96 6.46% 5.96%
11/22/96 6.44% 5.93%
11/29/96 6.35% 5.83%
12/6/96 6.51% 5.99%
12/13/96 6.57% 6.05%
12/20/96 6.61% 6.14%
12/27/96 6.56% 6.08%
1/3/97 6.73% 6.27%
1/10/97 6.85% 6.38%
1/17/97 6.82% 6.31%
1/24/97 6.89% 6.39%
1/31/97 6.79% 6.25%
2/7/97 6.70% 6.15%
2/14/97 6.52% 6.06%
2/21/97 6.64% 6.16%
2/28/97 6.80% 6.39%
</TABLE>
- ---- 30-Year Treasury Bond Yield ---- 5-Year Treasury Bond Yield
Source: Bloomberg L.P.
- - Yields remained in a somewhat narrow range during the six-month reporting
period. The first three months were characterized by weaker economic data.
Lower interest rates prompted renewed refinancing activity and consumer
spending, resulting in better employment growth which lead to higher rates
during the second half of the period.
14
<PAGE> 21
QUESTIONS TO THE PORTFOLIO MANAGEMENT TEAM
Q. SINCE THE STOCK MARKET HAS ACHIEVED RECORD HIGHS, IS IT TIME TO THINK ABOUT
CHANGING MY ASSET ALLOCATION PLAN?
A. Whenever there has been a significant divergence in returns between asset
classes, it is often a good time to review your portfolio asset allocation. For
example, for the three year period ended 12/31/96, total returns on large-cap
domestic stocks far exceeded domestic bond returns. The Schwab 1000 Fund(R) and
the Schwab Long-Term Government Bond Fund experienced three year total returns
of 75.4% and 20.2%, respectively.(1) As shown in the hypothetical example below,
if an investor had a portfolio with an asset allocation of 60% stocks and 40%
bonds (investing in just these two funds) at the beginning of the period, and
reinvested all fund distributions, the asset allocation mix would have shifted
to 69% stocks and 31% bonds by the end of the period -- a significant shift from
the investor's intended strategy.
<TABLE>
<CAPTION>
12/31/93 Portfolio Three Year 12/31/96 Portfolio
------------------ ------------------
Value Allocation Growth Value Allocation
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Schwab 1000 Fund $ 6,000 60% $4,524 $10,524 69%
Schwab Long-Term
Government Bond Fund $ 4,000 40% $ 808 $ 4,808 31%
Total Portfolio Value $10,000 100% $5,332 $15,332 100%
</TABLE>
Rather than trying to time markets, we feel that investors should focus on their
own risk profiles and income needs to determine the most appropriate level of
bonds in their portfolios. In addition to providing income, bonds have
performance characteristics which may make them an attractive element of a well
diversified investment portfolio. Since bond returns have historically not been
well correlated with stock returns,(2) combining bonds in a portfolio with
stocks can be an effective tool to reduce total portfolio volatility.
1 Total return assumes reinvestment of all dividends and capital gain
distributions, if any. Past performance is no guarantee of future results.
Principal value and investment returns will fluctuate, so that an investor's
shares, when redeemed, may be worth more or less than their original cost. The
Investment Manager and Schwab waived a portion of both Funds' fees during the
period. Without the waiver, each Fund's total return would have been lower.
2 Source: Symphony Asset Management. For the 20 year period ended 12/31/96, the
correlation of large-cap stock returns and government bond returns has been
0.37.
15
<PAGE> 22
Q. HOW WERE THE FUNDS MANAGED DURING THE REPORTING PERIOD? WERE ANY CHANGES MADE
TO THE PORTFOLIO?
A. SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND: The weighted average maturity
of the Fund was extended slightly during the six-month reporting period. In
early 1996, we shortened the Fund's maturity because economic signals indicated
that we were headed for stronger economic growth and higher interest rates. By
August of 1996, our assessment of the bond market was that there were
significantly lower risks of rising bond yields (and therefore falling bond
prices) so we began to moderately extend the maturity of the fund, thereby
moderately increasing the Fund's yield. The Fund's weighted average maturity at
the end of the period was 2.9 years, up from 2.5 years at the beginning of the
period.
SCHWAB LONG-TERM GOVERNMENT BOND FUND: In contrast to the Schwab
Short/Intermediate Government Bond Fund, we maintained the Fund's average
maturity at the shorter end of the allowable limit (10 years) over the period.
The interest rate movements over the course of the reporting period were quick
and volatile, primarily impacting the long end of the market. By adding yield as
a result of increasing the Fund's exposure to U.S. Government agency securities
and maintaining a relatively short maturity, we felt the Fund would be better
protected against the short run price volatility that we experienced during this
reporting period. The Fund's weighted average maturity at the end of the period
was 10.8 years, down slightly from 11.7 years at the beginning of the period.
In both Funds, we continue to execute a cautious strategy, carefully watching
economic indicators and monitoring Federal Reserve Bank communications regarding
its target level for short term interest rates.
Q. IS MY INVESTMENT GUARANTEED BY THE FEDERAL GOVERNMENT?
A. No. As shown in the pie charts on page 7, each Fund invests primarily in
securities issued or guaranteed by the U.S. Government (U.S. Treasury
obligations) or its agencies (such as the Federal National Mortgage
Association). U.S. Treasury securities are backed by the full faith and credit
of the U.S. Government. Although the credit risk is considered to be negligible,
there are no explicit or implicit federal guarantees of most of the securities
issued by the federally sponsored agencies.
16
<PAGE> 23
Having said this, government bond funds are subject to the same type of net
asset value fluctuation resulting from interest rate changes that corporate or
municipal bond funds are. Rising interest rates will cause bond values to fall,
with longer maturity funds experiencing the most significant declines. Although
government bond fund shareholders are substantially protected from
credit-related losses, they have no guarantees to protect them from these
interest rate related losses.
17
<PAGE> 24
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
(Unaudited)
ASSET CHANGE
<TABLE>
<CAPTION>
Total
Net Assets Total Percentage
as of Net Assets Change Over
2/28/97 as of 8/31/96 Reporting
(000s) (000s) Period
- --------------------------------------------------
<S> <C> <C>
$ 130,714 $134,019 (2%)
- --------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ------------------------------------------------------------------
(cum.)
<S> <C> <C> <C>
1 - 6 Months... $ 13,759 10.6% 10.6%
7 - 36 Months... 53,016 41.0 51.6
37 - 60 Months... 62,596 48.4 100.0%
-----
--------
$129,371 100.0%
-----
--------
-----
--------
Average Weighted Maturity--2.87 Years
</TABLE>
18
<PAGE> 25
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
PORTFOLIO SUMMARY
(Unaudited)
ASSET CHANGE
<TABLE>
<CAPTION>
Total Total Percentage
Net Assets Net Assets Change Over
as of 2/28/97 as of 8/31/96 Reporting
(000s) (000s) Period
- ---------------------------------------------------
<S> <C> <C>
$21,662 $22,761 (5%)
- ---------------------------------------------------
</TABLE>
AVERAGE WEIGHTED MATURITY AT FEBRUARY 28, 1997
<TABLE>
<CAPTION>
Value % of % of
Maturity Schedule (000s) Portfolio Portfolio
- ---------------------------------------------------------
(cum.)
<S> <C> <C> <C>
0 - 1 Year $ 540 2.5% 2.5%
2 - 10 Years 16,325 76.7 79.2
11 - 20 Years 3,903 18.4 97.6
21 - 30 Years 512 2.4 100.0%
------- ------
$21,280 100.0%
======= ======
Average Weighted Maturity--10.85 Years
</TABLE>
19
<PAGE> 26
SCHWAB SHORT/INTERMEDIATE GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS--42.6%(a)
U.S. Treasury Notes
5.63%, 08/31/97 $ 4,000 $ 4,001
7.88%, 01/15/98 2,700 2,750
7.25%, 02/15/98 5,000 5,068
5.88%, 08/15/98 2,000 1,999
6.88%, 07/31/99 3,000 3,047
7.13%, 09/30/99 5,000 5,113
5.88%, 11/15/99 5,000 4,962
7.75%, 12/31/99 5,000 5,198
5.88%, 06/30/00 3,000 2,966
5.63%, 02/28/01 5,000 4,879
6.63%, 06/30/01 10,000 10,098
6.38%, 09/30/01 5,000 4,999
------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $55,070) 55,080
------
AGENCY OBLIGATIONS--41.0%(a)
Federal Home Loan Bank
7.76%, 05/30/97 5,000 5,026
7.28%, 02/24/98 6,340 6,427
6.26%, 08/09/99 5,000 5,010
6.70%, 04/23/01 5,000 4,989
Federal Home Loan Mortgage Corp.
7.06%, 08/02/01 5,000 5,022
8.40%, 11/30/01 2,500 2,563
Federal National Mortgage Assoc.
6.50%, 01/27/00 5,000 5,006
6.75%, 08/24/00 5,000 5,021
6.45%, 03/26/01 5,000 4,958
6.74%, 05/07/01 9,070 9,059
------
TOTAL AGENCY OBLIGATIONS (Cost $52,968) 53,081
------
</TABLE>
20
<PAGE> 27
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------- --------
<S> <C> <C>
CMO (PLANNED AMORTIZATION CLASS)--12.7%(a)(c)
Federal Home Loan Mortgage Corp. Series 1295 G
7.50%, 05/15/99 $2,500 $ 2,533
Federal Home Loan Mortgage Corp. Series 1449 E
6.00%, 06/15/99 6,000 5,902
Federal National Mortgage Assoc. Series 1992-93 GB
7.00%, 10/25/00 5,000 5,027
Federal National Mortgage Assoc. Series 1992-94 G
7.00%, 04/25/00 3,000 3,016
------
TOTAL CMO (PLANNED AMORTIZATION CLASS) (Cost $16,351) 16,478
------
CASH EQUIVALENTS--3.7%(b)
Provident Institutional Funds--Fed Funds Portfolio
4.93%, 03/07/97 4,732 4,732
--------
TOTAL CASH EQUIVALENTS (Cost $4,732) 4,732
--------
TOTAL INVESTMENTS--100% (Cost $129,121) $129,371
========
</TABLE>
See accompanying Notes to Schedules of Investments.
21
<PAGE> 28
SCHWAB LONG-TERM GOVERNMENT BOND FUND
- ------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
AGENCY OBLIGATIONS--70.4%(a)
Federal Farm Credit Bank
8.06%, 01/04/05 $ 815 $ 875
6.27%, 01/26/16 1,000 906
Federal Home Loan Bank
6.45%, 06/08/05 1,000 978
6.43%, 09/19/05 1,000 976
Federal Home Loan Mortgage Corp.
6.92%, 09/15/05 1,000 982
7.53%, 08/07/06 2,000 2,024
6.88%, 11/22/06 1,000 982
8.57%, 10/26/09 500 517
Federal National Mortgage Assoc.
8.50%, 02/01/05 500 525
7.88%, 02/24/05 1,135 1,208
6.35%, 06/10/05 1,000 972
7.94%, 09/13/06 2,000 2,033
7.03%, 10/25/06 2,000 1,987
------
TOTAL AGENCY OBLIGATIONS (Cost $14,975) 14,965
------
U.S. TREASURY OBLIGATIONS--27.1%(a)
U.S. Treasury Bonds
7.25%, 05/15/16 800 831
7.50%, 11/15/16 1,550 1,649
7.13%, 02/15/23 500 512
U.S. Treasury Notes
5.75%, 08/15/03 310 299
7.25%, 08/15/04 250 261
5.88%, 11/15/05 750 716
7.00%, 07/15/06 500 514
6.50%, 10/15/06 1,000 993
------
TOTAL U.S. TREASURY OBLIGATIONS (Cost $5,688) 5,775
------
</TABLE>
22
<PAGE> 29
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par Value
------ -------
<S> <C> <C>
CASH EQUIVALENTS--2.5%(b)
Provident Institutional Funds -- Fed Funds Portfolio
4.93%, 03/07/97 $540 $ 540
------
TOTAL CASH EQUIVALENTS (Cost $540) 540
------
TOTAL INVESTMENTS--100% (Cost $21,203) $21,280
=======
</TABLE>
NOTES TO SCHEDULES OF INVESTMENTS
(a) Interest rates represent coupon rate of security.
(b) Interest rate represents the yield as of report date.
(c) Maturity dates represent average weighted maturities of the underlying
mortgage obligations.
See accompanying Notes to Financial Statements.
23
<PAGE> 30
- ------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES (in thousands)
February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
ASSETS
Investments, at value
(Cost: $129,121 and $21,203, respectively) $129,371 $21,280
Interest receivable 1,404 372
Receivable from advisor -- 6
Receivable for Fund shares sold 122 20
Deferred organization costs -- 17
Prepaid expenses 10 23
Dividends receivable 12 1
------- ------
Total assets 130,919 21,719
------- ------
LIABILITIES
Payable for:
Dividends 65 12
Fund shares redeemed 84 3
Investment advisory and administration fee 9 --
Other 47 42
-------- -------
Total liabilities 205 57
-------- -------
Net assets applicable to outstanding shares $130,714 $21,662
======== =======
NET ASSETS CONSIST OF:
Paid-in-capital $141,299 $21,865
Overdistributed net investment income (31) (9)
Accumulated net realized loss on
investments sold (10,804) (271)
Net unrealized gain on investments 250 77
-------- -------
$130,714 $21,662
======== =======
PRICING OF SHARES
Outstanding shares, $0.00001 par value
(unlimited shares authorized) 13,467 2,252
Net asset value, offering and
redemption price per share $9.71 $9.62
</TABLE>
See accompanying Notes to Financial Statements.
24
<PAGE> 31
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS (in thousands)
Six months ended February 28, 1997 (Unaudited)
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Government
Bond Fund Bond Fund
------------------ ----------
<S> <C> <C>
Interest income $4,318 $ 740
------ ------
Expenses:
Investment advisory and administration fee 268 44
Transfer agency and shareholder service
fees 165 27
Custodian fees 38 8
Registration fees 31 18
Professional fees 12 12
Shareholder reports 20 3
Trustees' fees 3 1
Amortization of deferred organization
costs 2 6
Insurance and other expenses 4 3
------ ------
543 122
Less expenses reduced and absorbed (see Note
4) (222) (112)
------ ------
Total expenses incurred by Fund 321 10
------ ------
Net investment income 3,997 730
------ ------
Net realized gain (loss) on investments sold (66) 27
Increase in net unrealized gain on
investments 737 531
------ ------
Net gain on investments 671 558
------ ------
Increase in net assets resulting from
operations $4,668 $1,288
====== ======
</TABLE>
See accompanying Notes to Financial Statements.
25
<PAGE> 32
- ------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS (in thousands)
<TABLE>
<CAPTION>
Schwab
Schwab Long-Term
Short/Intermediate Government
Government Bond Fund
Bond Fund -------------------------
-------------------------- Six months
Six months ended
ended Year February Year
February 28, ended 28, ended
1997 August 31, 1997 August 31,
(Unaudited) 1996 (Unaudited) 1996
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $ 3,997 $ 8,917 $ 730 $ 1,100
Net realized gain (loss) on
investments sold (66) 7 27 (30)
Increase (decrease) in net unrealized gain
on investments 737 (2,489) 531 (887)
-------- -------- ------- --------
Increase in net assets resulting from
operations 4,668 6,435 1,288 183
-------- -------- ------- --------
Dividends to shareholders from net
investment income (4,082) (8,934) (745) (1,098)
-------- -------- ------- --------
Capital share transactions:
Proceeds from shares sold 14,105 25,765 5,836 21,398
Net asset value of shares issued in
reinvestment of dividends 3,163 6,945 504 741
Less payments for shares redeemed (21,159) (53,383) (7,982) (11,412)
-------- -------- ------- --------
Increase (decrease) in net assets from
capital share transactions (3,891) (20,673) (1,642) 10,727
-------- -------- ------- --------
Total increase (decrease) in net assets (3,305) (23,172) (1,099) 9,812
Net Assets:
Beginning of period 134,019 157,191 22,761 12,949
-------- -------- ------- --------
End of period (including (over)
undistributed net investment income of
($31), $54, ($9) and $6, respectively) $130,714 $134,019 $21,662 $ 22,761
======== ======== ======= ========
Number of Fund Shares:
Sold 1,447 2,618 601 2,191
Reinvested 324 707 52 77
Redeemed (2,169) (5,428) (827) (1,163)
-------- -------- ------- --------
Net increase (decrease) in shares
outstanding (398) (2,103) (174) 1,105
Shares Outstanding:
Beginning of period 13,865 15,968 2,426 1,321
-------- -------- ------- --------
End of period 13,467 13,865 2,252 2,426
======== ======== ======= ========
</TABLE>
See accompanying Notes to Financial Statements.
26
<PAGE> 33
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
Six months ended February 28, 1997 (Unaudited)
1. DESCRIPTION OF THE FUNDS
The Schwab Short/Intermediate Government Bond Fund and Schwab Long-Term
Government Bond Fund (the "Funds") are series of Schwab Investments (the
"Trust"), a no load, open-end, management investment company organized as a
Massachusetts business trust on October 26, 1990 and registered under the
Investment Company Act of 1940, as amended.
In addition to the Funds, the Trust also offers -- the Schwab 1000 Fund(R),
Schwab California Short/Intermediate Tax-Free Bond Fund, Schwab California
Long-Term Tax-Free Bond Fund, Schwab Short/Intermediate Tax-Free Bond Fund and
Schwab Long-Term Tax-Free Bond Fund. The assets of each series are segregated
and accounted for separately.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are in conformity with generally
accepted accounting principles for investment companies. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates.
Security valuation -- Bonds and notes are generally valued at prices obtained
from an independent bond-pricing service. These securities are valued at the
mean between the most recent bid and asked prices, or if such prices are not
available, at prices for securities of comparable maturity, quality and type.
Short-term securities within 60 days or less of maturity are stated at amortized
cost, which approximates market value.
Security transactions and interest income -- Security transactions are accounted
for on a trade date basis (date the order to buy or sell is executed). Realized
gains and losses from security transactions are determined on an identified cost
basis. Interest income is accrued on a daily basis and includes amortization of
premium and accretion of discount on investments. For callable bonds purchased
at a premium, the excess of the purchase price over the call value is amortized
against interest income through the call date. If the call provision is not
exercised, any remaining premium is amortized through the final maturity date.
27
<PAGE> 34
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
Dividends to shareholders -- Each Fund declares a daily dividend, from its net
investment income for that day, payable monthly. Distributions of net capital
gains, of any, are recorded on ex-dividend date, payable annually on a calendar
year basis.
Deferred organization costs -- Costs incurred in connection with the
organization of the Funds and their initial registration with the Securities and
Exchange Commission are amortized on a straight-line basis over a five-year
period from each Fund's commencement of operations.
Expenses -- Expenses arising in connection with a Fund are charged directly to
that Fund. Expenses common to all series of the Trust are generally allocated to
each series in proportion to their relative net assets.
Federal income taxes -- It is each Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and realized net capital
gains, if any, to shareholders. Therefore, no federal income tax provision is
required. Each Fund is considered a separate entity for tax purposes.
At February 28, 1997, (for financial reporting and federal income tax purposes),
net unrealized gain for the Schwab Short/Intermediate Government Bond Fund
aggregated $250,000 of which $546,000 related to appreciated securities and
$296,000 related to depreciated securities, and net unrealized gain for the
Schwab Long-Term Government Bond Fund aggregated $77,000, of which $388,000
related to appreciated securities and $311,000 related to depreciated
securities.
At August 31, 1996, the Schwab Short/Intermediate Government Bond Fund had
unused capital loss carryforwards, for federal income tax purposes, of
$8,355,000 and $2,216,000 respectively expiring August 31, 2003 and August 31,
2004, respectively. The Schwab Long-Term Government Bond Fund had unused capital
loss carryforwards of $230,000 expiring August 31, 2003.
3. TRANSACTIONS WITH AFFILIATES
Investment advisory and administration agreement -- The Trust has an investment
advisory and administration agreement with Charles Schwab Investment Management,
Inc. (the "Investment Manager"). For advisory services and facilities furnished,
the Funds each pay an annual fee, payable
28
<PAGE> 35
- ------------------------------------------------------------------------------
monthly, of 0.41% of each Fund's average daily net assets. The Investment
Manager has reduced a portion of its fee for the six months ended February 28,
1997 (see Note 4).
Transfer agency and shareholder service agreements -- The Trust has transfer
agency and shareholder service agreements with Charles Schwab & Co., Inc.
("Schwab"). For services provided under these agreements, Schwab receives an
annual fee, payable monthly, of 0.05% of each Fund's average daily net assets
for transfer agency services and 0.20% of such assets for shareholder services.
Schwab has reduced a portion of its fees for the six months ended February 28,
1997 (see Note 4).
Officers and trustees -- Certain officers and trustees of the Trust are also
officers and/or directors of the Investment Manager and/or Schwab. During the
six months ended February 28, 1997, the Trust made no direct payments to its
officers or trustees who are "interested persons" within the meaning of the
Investment Company Act of 1940, as amended. The Funds incurred fees aggregating
$4,000 related to the Trust's unaffiliated trustees.
4. EXPENSES REDUCED AND ABSORBED BY THE INVESTMENT MANAGER AND SCHWAB
The Investment Manager and Schwab reduced a portion of their fees and absorbed
certain expenses in order to limit each Fund's ratio of operating expenses to
average net assets for each Fund. During the six months ended February 28, 1997,
the total of such fees reduced and absorbed by the Investment Manager and Schwab
were $65,000 and $157,000 for the Schwab Short/Intermediate Government Bond
Fund, respectively, and $85,000 and $27,000 for the Schwab Long-Term Government
Bond Fund, respectively (see Note 6).
29
<PAGE> 36
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
5. INVESTMENT TRANSACTIONS
Purchases, sales and maturities of investment securities, other than short-term
obligations, during the six months ended February 28, 1997, were as follows (in
thousands):
<TABLE>
<CAPTION>
Schwab Schwab
Short/Intermediate Long-Term
Government Bond Fund Government Bond Fund
-------------------- --------------------
<S> <C> <C>
Purchases $ 54,097 $6,010
Proceeds of sales and
maturities $ 61,526 $7,035
</TABLE>
30
<PAGE> 37
- ------------------------------------------------------------------------------
6. FINANCIAL HIGHLIGHTS
For a share outstanding throughout each period:
<TABLE>
<CAPTION>
Schwab Short/Intermediate Government Bond Fund
-------------------------------------------------------------------------
Six months Eight Year
ended months ended
February 28, ended December
1997 Year ended August 31, August 31, 31,
(Unaudited) 1996 1995 1994 1993 1992
------------ -------- -------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26 $ 10.28
Income from investment
- ----------------------
operations
----------
Net investment income 0.29 0.59 0.59 0.54 0.37 0.60
Net realized and unrealized gain
(loss) on investments 0.05 (0.17) 0.03 (0.71) 0.38 0.01
-------- -------- -------- -------- -------- --------
Total from investment
operations 0.34 0.42 0.62 (0.17) 0.75 0.61
Less distributions
- ------------------
Dividends from net investment
income (0.30) (0.59) (0.59) (0.54) (0.37) (0.60)
Distributions from realized gain
on investments -- -- -- (0.12) -- (0.03)
-------- -------- -------- -------- -------- --------
Total distributions (0.30) (0.59) (0.59) (0.66) (0.37) (0.63)
-------- -------- -------- -------- -------- --------
Net asset value at end of period $ 9.71 $ 9.67 $ 9.84 $ 9.81 $ 10.64 $ 10.26
======== ======== ======== ======== ======== ========
Total return (not annualized) 3.54% 4.39% 6.61% (1.67)% 7.39% 6.08%
- ------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $130,714 $134,019 $157,191 $190,479 $273,973 $226,223
Ratio of expenses to average
net assets+ 0.49%* 0.49% 0.58% 0.60% 0.60%* 0.43%
Ratio of net investment income
to average net assets+ 6.06%* 6.03% 6.11% 5.28% 5.28%* 5.78%
Portfolio turnover rate 38% 80% 203% 91% 107% 185%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average
net assets 0.82%* 0.80% 0.81% 0.81% 0.84%* 0.89%
Ratio of net investment income
to average net assets 5.72%* 5.72% 5.88% 5.07% 5.04%* 5.32%
</TABLE>
* Annualized
31
<PAGE> 38
- ------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)
6. FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
Schwab Long-Term
Government Bond Fund
--------------------------------------------------
Six months
ended Period
February 28, ended
1997 Year ended August 31, August 31,
(Unaudited) 1996 1995 1994 1993**
------------ ------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period $ 9.38 $ 9.80 $ 9.33 $10.53 $10.00
Income from investment
- ----------------------
operations
----------
Net investment income 0.33 0.65 0.69 0.60 0.31
Net realized and unrealized gain
(loss) on investments 0.24 (0.42) 0.47 (1.20) 0.53
------- ------- ------- ------ ------
Total from investment operations 0.57 0.23 1.16 (0.60) 0.84
Less distributions
- ------------------
Dividends from net investment
income (0.33) (0.65) (0.69) (0.60) (0.31)
Distributions from realized gain
on investments -- -- -- -- --
------- ------- ------- ------ ------
Total distributions (0.33) (0.65) (0.69) (0.60) (0.31)
------- ------- ------- ------ ------
Net asset value at end of period $ 9.62 $ 9.38 $ 9.80 $ 9.33 $10.53
======= ======= ======= ====== ======
Total return (not annualized) 6.14% 2.29% 13.03% (5.80)% 8.63%
- ------------
Ratios/Supplemental data
- ------------------------
Net assets, end of period (000s) $ 21,662 $22,761 $12,949 $7,108 $2,806
Ratio of expenses to average net
assets+ 0.10%* 0.00% 0.00% 0.10% 0.26%*
Ratio of net investment income to
average net assets+ 6.80%* 6.67% 7.38% 6.27% 6.36%*
Portfolio turnover rate 29% 66% 240% 123% 42%
</TABLE>
- ---------------
+ The information contained in the above table is based on actual expenses for
the periods, after giving effect to the portion of expenses reduced and
absorbed by the Investment Manager and Schwab. Had these expenses not been
reduced and absorbed, the Fund's expense and net investment income ratios
would have been:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of expenses to
average net assets 1.14%* 1.17% 1.18% 2.19% 19.19%*
Ratio of net investment income
to average net assets 5.76%* 5.50% 6.20% 4.18% (12.57)%*
</TABLE>
* Annualized
** For the period March 5, 1993 (commencement of operations) to August 31, 1993.
32
<PAGE> 39
SCHWABFUNDS FAMILY(R)
The SchwabFunds Family includes a variety of funds to help meet your investment
needs. You can diversify your portfolio in a single step with our asset
allocation funds. Or you can customize your portfolio with a combination of our
stock funds as well as our taxable and tax-advantaged bond and money funds.
SCHWAB ASSET ALLOCATION FUNDS
Schwab Asset Director(R) -- High Growth Fund
Schwab Asset Director -- Balanced Growth Fund
Schwab Asset Director -- Conservative Growth Fund
Schwab OneSource Portfolios -- Growth Allocation
Schwab OneSource Portfolios -- Balanced Allocation
SCHWAB STOCK FUNDS
Schwab 1000 Fund(R)
Schwab S&P 500 Fund
Schwab Analytics Fund(TM)
Schwab Small-Cap Index Fund(R)
Schwab International Index Fund(R)
Schwab OneSource Portfolios -- International
SCHWAB BOND FUNDS
Schwab Government Bond Funds -- Long-Term and Short/Intermediate
Schwab Tax-Free Bond Funds -- Long-Term and Short/Intermediate
Schwab California Tax-Free Bond Funds -- Long-Term and Short/Intermediate
SCHWAB MONEY MARKET FUNDS
Schwab offers an array of money market funds* that seek high current income with
safety and liquidity. Choose from taxable or tax-advantaged alternatives. Many
can be linked to your Schwab account to "sweep" cash balances automatically when
you're between investments. Or, for your larger cash reserves, choose one of our
Value Advantage Investments(R).
Please call 1-800-2 NO-LOAD for a free prospectus and brochure for any of the
SchwabFunds(R).
Each prospectus provides more complete information, including charges and
expenses. Please read it carefully before investing.
This report must be preceded or accompanied by a current prospectus.
*Investments in money market funds are neither insured nor guaranteed by the
U.S. government, and there is no assurance that the funds will be able to
maintain a stable share price of $1.
<PAGE> 40
[SCHWABFUNDS FAMILY(R) LOGO] BULK RATE
U.S. POSTAGE
PAID
CHARLES SCHWAB
101 Montgomery Street
San Francisco, California 94104
INVESTMENT ADVISOR
Charles Schwab Investment Management, Inc.
101 Montgomery Street, San Francisco, CA 94104
DISTRIBUTOR
Charles Schwab & Co., Inc.
101 Montgomery Street, San Francisco, CA 94104
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
(C)1997 Charles Schwab & Co., Inc. All rights reserved.
Member SIPC/NYSE.
TF4630R(4/97) CRS 20033 Printed on recycled paper.
